2 1. Introduction Thr hav bn larg discussions latly in Spain ovr th sustainability of its currnt nrgy modl and how it will b affctd by th rcnt uropan policis rlatd with nrgy marts libralisation, rduction of CO 2 missions and promotion of rnwabl nrgis (Hrnandz t al, 24). And spcifically, th dbat has focusd mostly on th impact that th uropan Union Carbon missions Trading Dirctiv (C, 23) will hav on th Spanish lctricity sctor (basically, on lctricity prics and on th profitability of utilitis). This Dirctiv sts up, from th 1 st January 25, an uropan mart for carbon missions in ordr to comply mor fficintly with th compromiss undrtan by th uropan Union undr th Kyoto Protocol (namly, an 8% rduction in GHG missions compard to 199 lvls). Howvr, th Dirctiv is not xactly qual to th Protocol: it only applis to som sctors (basically, to industry, whras transport and th trtiary sctor ar lft out of th rgim); it will ntr into forc bfor th Protocol (it has stablishd a prliminary trading priod starting in 25); and it only covrs carbon missions and not th rst of grnhous gass. Th Dirctiv (or its accompanying documnts) also stablishs that th carbon prmits hav to b allocatd frly to thir most part, only proposing som idas on how to distribut thm among th sctors and firms affctd. Th final assignmnt has to b dcidd by th National Allocation Plans (NAPs), of which th Spanish on was approvd just in January 25 (RD 6/25). Howvr, th currnt NAP only covrs up to 27, and thrfor a nw on will b ndd for th ral Kyoto trading priod starting in 28. 2

3 This lattr aspct is spcially rlvant, givn that diffrnt allocation plans may hav diffrnt consquncs on th lctricity sctor as a whol, and on th diffrnt firms prsnt in Spain. Indd, this has cratd a battl btwn utilitis, contrary to th traditional common position. Howvr, most of th discussions hav bn hld on qualitativ grounds, or with rstrictd information, and thrfor it is difficult to draw spcific conclusions and policy rcommndations from it. Th objctiv of this papr is to bring som light into this discussion, by providing rasonabl stimats of th impact that th Dirctiv may hav on th lctricity sctor, not only on lctricity prics, but also on th tchnology mix, and on th rvnus of lctric utilitis. Although rsults ar focusd on th Spanish cas, th major conclusions may asily b xtrapolatd to othr uropan countris with similar rgulations. Th xisting litratur on th modlling of missions trading in th nrgy sctor is vry rich indd. Most of th xrciss hav bn carrid out with larg nrgyconomy-nvironmnt modls, of which a vry thorough rviw may b found for xampl in Huntington and Wyant (24). As for spcific applications, w may cit th wor of McKibbin t al (1999), Criqui and Viguir (2), Viguir t al (23), or Barrto and Kypros (24). Howvr, ths modls covr gnrally larg rgions and larg sctors, and thrfor ar not abl to provid spcific rsults for th lctricity sctor, which is a rlvant playr in many conomis, and crtaintly not spcific for th Spanish lctricity sctor, which is th objctiv of this study. Thrfor, mor dtaild modls ar ndd. 3

13 way to us coal in a clan mannr, whras by advancd nuclar w nam th nxt gnration of nuclar powr plants which is alrady dvlopd in som countris. Th charactrisation of ths futur tchnologis has bn basd on th STRIS databas (C, 24). Th paramtrs for all tchnologis ar shown in Tabl 1a, 1b and 1c of th Appndix. As for th carbon missions mart, th amount of prmits usd has bn th total amount stablishd by th Spanish National Allocation Plan (RD 6/25), that is, 16 Mt. Howvr, as said bfor, th Plan only covrs th priod From 28, th Govrnmnt nvisags that missions should not b highr than thos of 199 incrmntd in a 24%, so th total amount of prmits from 28 to 214 will b Mt. It has to b notd that this is th whol amount of prmits distributd among all sctors covrd by th Dirctiv. Howvr, only th lctricity sctor has bn modlld in dtail. Th rst of sctors ar much mor difficult to modl adquatly, bcaus of thir disaggrgation (thr ar many small CO 2 -producing facilitis, with vry diffrnt charactristics) and lac of data. Howvr, this sam disaggrgation allows to assum that thy will bhav as pric-tars in th missions mart, and thrfor thy may b modlld as a comptitiv fring by mans of a rsidual dmand function. This dmand function is th aggrgatd marginal abatmnt cost curv for all ths sctors in Spain, and has bn obtaind from th PRIMS modl (Capros t al, 21). Of cours, sinc th Dirctiv sts up an uropan prmit mart, allowing trad btwn countris, th xpctd rsults for th allowanc pric may b diffrnt than thos simulatd hr. On th on hand, th Spanish nrgy tchnologis and th 13

15 Basically, prmits may b auctiond or grandfathrd (with combinations btwn thm), and in cas of grandfathring, also diffrnt options may b studid: basd on historical missions, basd on actual and xpctd missions, basd on nrgy producd, tc. All mthods hav bn analysd in this papr. Th mthod chosn by th Spanish govrnmnt is not a clar-cut on, rathr an intrmdiat btwn historical and xpctd missions. It should b notd also that th uropan Dirctiv dos not allow for auctioning in th first assignmnt priod (25-7), and th Spanish govrnmnt viws ar also against this option in a first stag. Thrfor, th auction option may b somwhat unralistic currntly. Howvr, w hav dmd it usful to also prsnt its rsults in ordr to provid som rfrnc for th othr mthods, and also bcaus it might b considrd an option for 28. It should also b rmindd that th only variabl affctd by th choic of th assignmnt mthod will b th arnings of th gnrating firms (and of cours public rvnus), givn that, if prfct comptition is assumd for th missions mart, th pric of th prmit and th amount mittd will not b affctd. 3.3 Rsults Th main rsults of th simulation ar shown in Tabl 2. Both th rsults of th simulation with and without CO 2 rstrictions ar shown in ordr to highlight th stimatd impacts of th Dirctiv. In this first tabl th lctricity pric, th mission prmit pric, amount of missions and amount of nw invstmnts ar shown. Non of thm dpnd, as mntiond abov, on th assignmnt mthod chosn so thy ar common for all of thm. 15

16 Tabl 2. xpctd lctricity and carbon prics, missions and invstmnt in CCGT (prics xprssd in constant 24) Yar Dmand lctricity mission missions Invstmnt in TWh pric c /Wh prmit pric Mton CO 2 CCGT MW /ton CO 2 Dir. No Dir. Dir. No Dir. Dir. No Dir. Dir. No Dir As may b sn, onc th missions trading rgim ntrs into forc, thr appars a pric for CO 2 missions, which rachs up to 15 /t for th priod considrd, incrasing stadily as dmand riss (what is consistnt with othr studis rsults). Part of this cost of th mission is incorporatd into lctricity prics, which incras mor than 2% compard with th situation without th Dirctiv. Carbon missions ar vry much rducd compard to th situation without Dirctiv, and in fact th lctricity sctor rducs mor its missions than othr sctors, rducing its shar of missions from th currnt 55% to a 46% in th first priod and to a 49% from

22 ordr to allow for comptition to xist in th mart), or somwhat rdistributing arnings among firms. A dbat is currntly bing hld in this issu. All ths rsults ar of cours snsitiv to th amount of prmits distributd, to th cost of tchnologis (spcially CCGTs), but also to invstmnt rstrictions: firms may not hav nough financial flxibility to chang thir gnrating tchnologis and this may crat a larg volatility in lctricity and prmit prics. This also xplains that nuclar may not provid short-trm solutions to th problm vn if th currnt nuclar moratorium is liftd, givn th larg invstmnts involvd. Thrfor, rsults show that thr ar larg implications for th Spanish lctricity sctor of th uropan Dirctiv, which may also imply a crtain dgr of intrvntion by th rgulators. This may wll rquir a furthr and mor dtaild analysis of th situation, introducing for xampl a bttr tratmnt of th uncrtaintis ahad, of th invstmnts rstrictions, or of othr dcision paramtrs othr than profit maximization which may bttr dscrib firms bhaviour. Also furthr intractions with th rst of th Spanish conomy and with th uropan missions mart should b xplord. It has to b rmindd that in a short tim th NAP has to b rvisd for th nxt priod, so all ths issus ar rally rlvant at this momnt. Acnowldgmnts Th authors ar gratful to Fundacion BBVA and to th uropan Commission (Contract 4.13/C/2 4/22) for thir conomic support to this wor, and also to two anonymous rfrs for thir constructiv commnts which hav gratly improvd this papr. Th usual disclaimr applis. 22

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